Gas is nearly $4 again and diesel just topped $5. It’s not what you think

Fuel Costs Surge as Refinery Constraints Outweigh Oil Price Movements

Gas is nearly 4 again and diesel – Motorists are bracing for another encounter with the $4-per-gallon milestone as American gasoline prices climb steadily. According to AAA, the national average has jumped 15 cents over a single week to reach $3.94, putting it on track to breach the four-dollar mark once more. Diesel, a critical component in shipping and logistics, also made headlines Thursday by surpassing $5 per gallon for the first time in three weeks. These numbers serve as a stark reminder that the ongoing military tensions in the Persian Gulf region are directly impacting consumer wallets. However, the situation is more complex than a simple correlation between conflict and fuel costs.

A Decoupling from Traditional Oil Markets

The relationship between crude oil and finished fuel products has grown increasingly complicated. While rising oil prices certainly play a role, gasoline and diesel have developed their own momentum, somewhat independent of events in the Strait of Hormuz or diplomatic negotiations with Iran. During the three-week period when the strategic waterway remained at least partially navigable, oil producers successfully extracted over 200 million barrels of crude from the Persian Gulf. This surge in supply briefly pushed oil prices below their pre-conflict levels, and fuel costs at the pump dropped accordingly. Yet those reductions never returned to pre-war baselines.

Following the collapse of the Memorandum of Understanding between Iran and the United States last week, crude prices accelerated upward, climbing above $85 per barrel after spending recent weeks in the low $70 range. This movement matters significantly for consumers because crude oil constitutes the overwhelming majority of gasoline’s final cost. Nevertheless, a notable divergence has emerged: while crude oil has appreciated by 16 percent since hostilities began, both gasoline and diesel have climbed more than 32 percent—essentially doubling the gains seen in the raw oil market.

Refinery Bottlenecks Drive the Discrepancy

This substantial gap between raw material costs and retail prices stems from both trading mechanics and the physical limitations of oil refining infrastructure. Even when crude flowed freely from the strait during periods of relative calm, that raw material required processing facilities capable of converting it into usable products. Refineries had already established their operational plans for July when the diplomatic agreement was initially signed, meaning they cannot quickly adjust their processing capacity.

The global refining landscape suffered considerable damage during the conflict. Iran’s military actions resulted in the destruction or severe impairment of 30 refineries across the Middle East, preventing any meaningful recovery once the Memorandum of Understanding took effect. Natasha Kaneva, JPMorgan’s chief commodities economist, notes that global refinery output contracted by 3 million barrels at the height of the Strait of Hormuz disruption, with 2.1 million barrels of refining capacity still sitting idle.

Global Supply Chains Under Pressure

Meanwhile, events unfolding in Eastern Europe have created an unexpected ripple effect. Ukraine’s sustained drone campaign has inflicted substantial damage on Russian refining facilities. As a consequence, the world’s second-largest diesel exporter has halted its fuel exports and transformed into a net importer, triggering a worldwide shortage of diesel fuel. The United States faces a contrasting challenge: its refineries operated at 96 percent capacity last month, processing the highest volume of crude since 2019 during the second quarter.

However, this robust production capacity is being redirected overseas. Record quantities of American-produced fuel are flowing to international markets—jet fuel heading to Europe and diesel shipping to Asia and Australia—to help stabilize global fuel supplies. This export surge has pushed US gasoline inventories to their lowest point since 2012. Andy Lipow, president of Lipow Oil Associates, reports that current stockpiles stand at 210 million barrels, merely 20 million barrels above critical thresholds. These levels remain just over 30 million barrels higher than the lows recorded during Hurricane Katrina, when gas stations nationwide experienced severe shortages.

Summer Demand and Weather Challenges

The domestic fuel picture is further complicated by shifting demand patterns. The portion of American fuel reserved for the US market is declining while summer travel demand climbs. Diesel requirements are simultaneously approaching their seasonal peak as agricultural operations prepare for the fall harvest. This combination of constrained supply and elevated demand has driven crack spreads—the profit margins earned by US refineries—to unprecedented heights. The US Energy Information Administration reports that gasoline crack spreads have increased 60 percent compared to last year, while diesel and jet fuel spreads have more than doubled their 2025 levels.

Adding to these pressures, this summer’s extreme temperatures present an additional operational hurdle. Refineries require cooler conditions to function optimally, as the process involves boiling crude oil into its various components and then cooling those products to produce gasoline, diesel, jet fuel, and other derivatives. When temperatures soar beyond normal ranges, refineries struggle to maintain efficiency and cannot produce as much fuel as they otherwise would, potentially exacerbating the price pressures consumers already feel at the pump.